Which statement describes liabilities?

Which statement describes liabilities?

• A. Assets owed by the business.
• B. Debts owed by the business.
• C. Investments by owners.
• D. Revenues earned.

Answer: (B)

Liabilities are obligations the business must settle in the future. They arise from past events and represent debts the company owes to others, such as loans, accounts payable, or taxes payable. On the balance sheet, liabilities are paired with assets to show what the business owns and what it owes, following the equation Assets = Liabilities + Equity. The statement that describes liabilities as debts owed by the business fits this idea exactly. By contrast, assets are resources the business owns, such as cash or equipment; investments by owners are equity representing the owners’ claims on assets; and revenues earned are income that increases equity, not obligations.

Liabilities are obligations the business must settle in the future. They arise from past events and represent debts the company owes to others, such as loans, accounts payable, or taxes payable. On the balance sheet, liabilities are paired with assets to show what the business owns and what it owes, following the equation Assets = Liabilities + Equity. The statement that describes liabilities as debts owed by the business fits this idea exactly.

By contrast, assets are resources the business owns, such as cash or equipment; investments by owners are equity representing the owners’ claims on assets; and revenues earned are income that increases equity, not obligations.